“Doom Loop: Nouriel Roubini Predicts Major Crisis for US Economy with High Inflation and Debt Crisis”

• The “Doom Loop” is an ongoing economic downturn, this happens because one negative condition triggers another bad condition.
• Roubini said the Doom Loop “will occur due to high inflation, debt crisis and problems of financial stability.
• The decline in the US economy could impact Indonesia, from the financial sector to the real sector.

Jakarta, CNBC Indonesia – Many of the United States (US) predict that they will experience a recession this year, but Nouriel Roubini predicts it will be even worse.

Roubini, known as “Dr. Doom” or “Dr. Doomsday”, predicts that the US economy will experience a major crisis and enter the so-called “doom loop”.

Doom loop in the economy according to Investopedia is a situation where one negative condition of the economy will trigger a second negative condition which in turn triggers a third negative condition or worsens the first condition. This will result in an economic contraction that continues to decline and gets worse.

In an article quoted by Business Insider, Roubini predicts that the world’s largest economy will experience a cycle of decline due to high inflation and massive debt. These two problems will continue and create a recession until the next financial crisis gets worse.

“A severe recession is the only thing that can dampen inflation and increase wages, but it will make the debt crisis worse which will eventually trigger a deeper economic downturn,” Roubini said as reported by Business Insider, Sunday (2/4/2023) .

“Current liquidity is unable to dampen the systemic doom loop, so everyone must be prepared to face stagflation and a debt crisis,” he added.

Liquidity in the United States is currently tightening after the US central bank (The Fed) raised interest rates very aggressively. Since March 2022, interest rates have been raised by 475 basis points to 4.75% – 5%.

Meanwhile, debt has grown after the Corona virus disease (Covid-19) pandemic. The reason is that government spending is getting bigger, while revenue is actually decreasing. The US government must continue to issue debt securities (Treasury), so that the ratio of debt to gross domestic product reached 134% in 2020, which is an all-time high. This ratio has indeed decreased, but is still far above the pre-pandemic level.

If the United States again experiences a recession, even a severe one, then the state’s income will naturally decline again. On the other hand, the government must save the economy by launching fiscal stimulus, meaning that spending will increase again. The only way to re-issuing debt securities.

Seeing this, the disaster for the US economy came from three things according to “Doctor Doomsday”, high inflation, large debt and financial stability.

However, the solutions to the problems facing the United States today are so contradictory, that the Fed has a “trilemma”.

To ease the debt burden, the Fed needs to lower its benchmark interest rate, but to reduce inflation what is needed is high interest rates. This matter became even more complicated after the collapse of Silicon Valley Bank (SVB), which increased pressure for the Fed to loosen monetary policy in order to maintain financial system stability.

Roubini sees that the United States will experience stagflation and a debt crisis which is a combination of the crises of the 1970s and 2008, so it will be very bad.

Considering that the United States is a country with the largest economic value in the world, when it experiences a downturn, other countries will certainly be affected, including Indonesia.

RI’s financial market is the first to be affected. Roubini said the US stock market (Wall Street) could fall by up to 30%. As the mecca of world stock exchanges, the collapse of Wall Street will certainly have an impact on other exchanges, including the Composite Stock Price Index (IHSG).

After the financial market, the real sector follows. The United States is Indonesia’s second largest export market after China. Throughout 2021 the value of exports to Uncle Sam’s country reached US$ 28.2 billion and contributed 10% of total exports.

CNBC INDONESIA RESEARCH

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